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The massive, aging oil fields at the heart of China’s latest corruption purge

The Daqing oil field in northeast China is “closely related with the destiny of the nation,” in the words of the official state website. In operation since 1959, China’s largest oil field supplies about a third of the country’s dwindling petrochemical production. Along with China’s other major oil fields, Daqing’s decline has sparked a global shopping spree for new oil reserves—and, more recently, is closely tied to a massive corruption investigation that is threatening to take down some of China’s most well-connected officials.

The investigation of PetroChina, the massive state-owned oil company that operates Daqing, is part of the net closing around oil industry veteran and former Chinese security chief Zhou Yongkang, who may become the first member of China’s Standing Politburo Committee to be investigated in more than 40 years. Daqing was where Zhou first started working in the oil industry after graduating from the Beijing Petroleum Institute; he was even responsible for naming the Daqing oil museum.

Other executives under investigation who have ties to Daqing include Wong Yongchung, the vice president of PetroChina’s parent company and manager of the Daqing field, who is being investigated for “gross violation of party discipline,” a common euphemism for corruption; and Hua Bangsong, whose Wison Engineering Services firm has worked closely with PetroChina on Daqing, and who is “assisting” authorities with their investigation.

Several other officials under investigation have close ties to the Shengli field, China’s second largest; Ran Xinquan, another PetroChina executive who recently resigned, ran the Changqing oil field, China’s third largest.

As China’s oil finds from the 1950s and 1960s get older, production is plummeting as the oil becomes harder to reach. Output from Daqing and Shengli is likely to “decline significantly in the coming years,” according to an analysis by the US government. Daqing produces about 800,000 barrels of oil a day—down from 1 million barrels per day a few years ago—and it contributed over half of PetroChina’s net profit margin in 2012, according to a recent report by Tianto Info Consulting (link in Chinese).

The slowing output may be where PetroChina’s corruption problems began.

PetroChina is a vertically integrated giant that even manufactures its own drill bits and trucks, said Simon Powell, the head of oil and gas in Asia for brokerage CSLA.  But China’s slow-to-change state-run industries often do not have the latest technology such as tools for “enhanced oil recovery,” the more aggressive drilling methods used on older wells.

Daqing and other fields started bringing in third party companies and independent contractors in recent years, which opened the door wide for potential temptations for officials to enrich themselves.

“The opportunities for corruption and nepotism are almost boundless when you bring in external companies to work with a state-run one,” said Powell, in part because China’s state-run industries (even publicly traded arms like PetroChina) do not have a transparent tendering process.

Other factors, including a political struggle in Beijing, have contributed to the oil corruption crackdown, which began on the day that the trial of Bo Xilai, once a hugely popular politician and a close ally of Zhou, drew to a close. But those aging fields are now being scrutinized like never before—whether they are the cause for the investigation, or merely the pretext.

Jennifer Chiu contributed reporting and translation.

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